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WebMemo #759 on Trade and Economic Freedom

June 10, 2005

The United Nations Reform Act of 2005: A Powerful Lever to Advance U.N. Reform

By

The selection of Paul Wolfowitz as the American candidate to succeed James Wolfensohn as President of the World Bank has ruffled feathers in Europe. This is no surprise, as Deputy Secretary of Defense Wolfowitz is known as an architect of the Iraq war, which was unpopular in much of Europe. These governments should look past their animosity and recognize the strengths that make Wolfowitz a good candidate:

  • Development experience. During the Reagan Administration, Wolfowitz served as Assistant Secretary of State for East Asian and Pacific Affairs and as Ambassador to Indonesia. In these positions, he witnessed the challenges that developing countries face and East Asia's dramatic development successes.
     
  • Management expertise. As Deputy Secretary of Defense, Wolfowitz is a senior member of the management team in charge of millions of individuals and a budget of hundreds of billions of dollars. He has seen the Department of Defense through its most sweeping reorientation in years while simultaneously conducting two wars.
     
  • Academic credentials. Wolfowitz earned a doctorate from the University of Chicago, has taught at Yale, and was Dean and Professor of International Relations at the School of Advanced International Studies (SAIS) of The Johns Hopkins University. 

Wolfowitz's knowledge and experience will be extremely useful in improving the effectiveness of the Bank. Between 1980 and 2002, the World Bank's International Bank for Reconstruction and Development and International Development Association provided $68.2 billion (in 1995 dollars) in development assistance to the 48 countries in sub-Saharan Africa to spur development in the region. This is a huge investment, particularly when the relatively small sizes of the recipient countries' economies are taken into account. Despite this development investment (often at extremely subsidized interest rates and with generous repayment schedules), sub-Saharan Africa has performed dismally. Of the 45 sub-Saharan African countries for which per capita GDP data are available from 1980 to 2002:

  • Twenty-three experienced negative compound annual growth in real per capita GDP (constant 1995 U.S. dollars);
  • Seven experienced marginal compound annual growth of less than 1 percent in real per capita GDP; and
  • Fifteen experienced compound annual growth of more than 1 percent in real per capita GDP, but only three achieved per capita growth over 4 percent.

The World Bank has failed to effectively promote economic growth and poverty reduction. Research from The Heritage Foundation shows that the best way for countries to increase economic growth is to adopt policies that promote economic freedom and the rule of law.[1] To increase development, the World Bank should emulate the Millennium Challenge Account (MCA). The MCA is a new approach to foreign assistance that makes assistance available only to countries "that govern justly, invest in their people and encourage economic freedom."[2] It should also provide assistance in grants to avoid unsustainable debt and end its current practice of extending loans to middle-income countries that have access to international capital markets.

 

As noted by Allan Meltzer, chairman of the International Financial Institution Advisory Commission, the World Bank "is a dysfunctional organization. It has hundreds of programs but little understanding of which are effective, where they work, and why. At present, it does not need a development expert to lead it… What it lacks is effective leadership."[3] Wolfowitz, with his track record of leadership and strong management skills, is prefect for such a task.

 

How the President Is Selected

The World Bank announced that "the Executive Directors have agreed to conduct informal meetings over the coming days with the United States' nominee as part of the consultative process on this subject. Thereafter, the Executive Directors will meet in formal session to select the President, at which time an official announcement of the outcome will be made."[4]

 

Tradition holds that the President of the World Bank is an American and the Managing Director of the International Monetary Fund is a European, but there are no rules to that effect. Indeed, there are no formal procedures for selecting the President of the World Bank. The Bank's Articles of Agreement simply state, "The Executive Directors shall select a President who shall not be a governor or an executive director or an alternate for either."[5] In the past, the President has been elected through consensus rather than formal voting, but if a vote were required the selection would be made through a simple majority of the voting stock.[6]

 

The United States is the largest contributor to the World Bank, providing 16.85 percent of total subscriptions to the International Bank for Reconstruction and Development (IBRD), and controls 16.39 percent of the voting stock. Despite the tradition of the President being an American and the fact that the U.S. is the largest donor, the U.S. cannot impose its choice. It must gain support from other nations. Japan is second in voting power to the U.S., at 7.87 percent of the voting stock. The European Union countries and Canada control over 30 percent of the votes-their own and the votes of countries that they represent.[7]

 

The European nations should overcome their differences about the Iraq war and join with the U.S. in trying to improve the effectiveness of the World Bank. Wolfowitz has the experience and skills necessary to refocus the Bank on its primary mission of eradicating poverty. He deserves their support. 

 

Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs in the Center for International Trade and Economics at The Heritage Foundation.



[1] See Marc Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004).

[2] For more information about the Millennium Challenge Accounts, see www.mca.gov.

[3] Allan H. Meltzer, "Regime Change at the World Bank," The Wall Street Journal, March 18, 2005, p. A12.

[4] The World Bank , "Further Communication on Selection of the President,"March 18, 2005, at http://www.worldbank.org/html/extdr/pr031805.htm.

[5] IBRD Articles of Agreement, Section 5 (a). 

[6] Section 3(b) of the Articles of Agreement state, "Except as otherwise specifically provided, all matters before the Bank shall be decided by a majority of the votes cast."

[7] There are 24 Executive Directors that represent 184 countries. The five largest donors (the United States, Japan, Germany, France, and the United Kingdom) have their own Executive Directors. The remaining countries are grouped together and elect Executive Directors for their groups. See The World Bank,  " IBRD Executive Directors Voting Status."

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